With the financial media starting to discuss rumblings of a new bull market on the way, investors owe it to themselves to prepare. But what is there to do in anticipation of the possibility that the stock market could resume its upward climb?
Three basic things are particularly important to do, so let’s take a few minutes and think about each.
1. Think about which risk assets you’re interested in buying
Bull markets see a rising tide of share prices that buoys both conservative investments and more speculative ones. If you think there’s a bull market on the horizon, it could make sense to buy shares of companies that are likely to be buoyed more strongly as you might have to pay more if you wait. That means taking inventory of the somewhat riskier options on the table and making a plan for buying them, provided that your portfolio is already adequately diversified and you can afford to invest the money for years without needing it.
For example, a company like CRISPR Therapeutics (CRSP -5.36%) could be a strong performer in a bull market. It isn’t profitable, and it won’t have any medicines on the market anytime soon. But that was true during the last bull market too, and its stock still skyrocketed — at least until concerns about inflation extinguished the bull run.
Once you’ve found a company or two that you want to invest in, don’t wait for the bull market to actually happen to buy shares. The idea is that if you get in now, you’ll benefit later when other investors come along and bid up prices.
2. Identify holdings that you’re ready to sell at a profit
Bull markets are a smart time to offload your winning investments that you think are going to run out of juice. Getting one last run-up ensures that you make a bit more money from your investment, and it will also force you to think seriously about how your investing thesis has shifted to justify a sale despite the gains still rolling in. Letting go of one of your winners isn’t something to do lightly, but a looming bull market is a great excuse to develop a plan, even if you don’t use it.
Let’s say you’ve held Walgreens Boots Alliance (WBA -2.71%) stock for the last 10 years, and your investment is up by 49%. Compared to the market’s return of more than 241%, that’s underperforming, even though you haven’t lost any money. If your investment thesis held that the company could outperform the market over a 10-year period due to its cash-generating business model and diligent cost controls, the fact that its annual free cash flow (FCF) has fallen and its total expenses have risen as a proportion of revenue over those years seems like a pretty strong refutation, which means you could be justified in making a sale.
So if you’re tired of making less than you would with an index fund, a bull market is a decent time to sell and reinvest the money elsewhere.
3. Set your expectations conservatively
The final thing to do is to consider your assumptions about the future performance of your investments and ensure that your expectations are grounded. The point of the exercise is to get you thinking about your portfolio companies and understanding the range of different situations that the market might throw at you so that you’re better equipped to take rational actions when those scenarios occur. That’ll reduce your anxiety while also making you a savvier investor.
For instance, if in a bull market you expect a company like Walgreens to largely retain its value in the face of surprising and bad economic news or a market correction, when those adverse events happen, you won’t be as likely to be rattled into selling your shares. After all, you figured out that its business model is largely all-weather, and its massive retail footprint has genuine value that fluctuations in the market can’t erode. And if your properly set expectations end up being incorrect, you will then see that there is some element of your investing thesis that may be wrong, which is valuable to know.
In contrast, if you expect a bull market to cause CRISPR Therapeutics’ stock to head toward the Moon within a few months, you might be confused and liable to quit your position prematurely when its shares rise by “merely” 10%. In this situation, having overly high expectations will probably make you lose money in the long term, especially if you’re salivating about the share performance of other early-stage biotech stocks.
If, on the other hand, you recognize that the gains of bull markets are not necessarily distributed evenly, and that businesses like CRISPR typically need a clinical or regulatory catalyst to spur large movements upward, you’ll be more likely to have the patience needed to eke out a profit on your shares.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CRISPR. The Motley Fool has a disclosure policy.